From Australia’s Central Bank Governor, A Cry for Help

Australia’s central bank governor seems to be at the end of his tether. Eight interest rate cuts over the past two years have brought the country’s benchmark interest rate to record lows, but have failed to spark a broad-based economic recovery. Cutting them more might push an already frothy housing market over the edge.

Reserve Bank of Australia Governor Glenn Stevens says the government must do more to promote an economic recovery.

Reuters

Now, Glenn Stevens is saying, it’s up to the government to provide the spark for recovery.

Mr. Stevens sent a thinly veiled message to Canberra this week, seeking leadership and a forward-looking program aimed at boosting productivity and protecting living standards as the economy confronts the end of a long mining boom.

“Firms and individuals have to have the confidence to take advantage of that situation. They have to be willing to take a risk—a risk on a new project, a new product, a new market or a new worker,” Mr. Stevens told a parliamentary committee Wednesday. “Monetary policy can’t force that process. We can’t force spending to occur. That is why the conduct of other policies is also important.”

In his soft-spoken style, the Reserve Bank of Australia chief was imploring the three-month-old conservative government to enact reforms — or Australian living standards will drop in coming years.

Australian society, he said, seems to assume that economic growth will simply continue on its own – after all, the country has gone 23 years without a recession.

“I think we are at a time when that assumption has to be questioned,” Mr. Stevens said.

Australia’s resource-rich economy grew 0.6% in the third quarter from the second, and 2.3% from a year earlier. The government this week forecast growth of 2.5% in the year through June 30, much slower than growth as high as 4% last year.

Sectors like manufacturing and tourism have been slow to pick up the slack as a decade-long boom in mining investment fades. The decline in mining is set to gather speed as remaining projects, especially in gas, are completed in 2015. The RBA has been warning that the mining slowdown is even worse than official data suggest.

In an interview with The Wall Street Journal earlier this month Mr. Stevens cautioned against hubris, calling for reforms of a type not seen in Australia since the 1980s — when the country floated its currency, deregulated its banks and lowered protections for industry.

A spokesman for Mr. Hockey said the May budget will launch the government’s reform agenda, which will start by addressing the problem of falling revenue and growing demand for spending and government services.

Earlier this week, delivering his first economic update since the government was elected in September, Mr. Hockey painted a picture of widening budget deficits, slowing economic growth, weak tax revenue and rising demand for government services. Mr. Hockey said the spending side of the budget would feel the brunt of the change.

Mr. Stevens also sees government spending as an area ripe for change, saying a conversation is needed about reasonable expectations for government services and tax levels. In short, he says, fiscal sustainability needs a rethink.

The slow but steady erosion of the economy’s underpinnings is visible in Australia’s job market. Unemployment remains low by world standards — but only because participation in the workforce has dropped. That reflects an aging population and sluggishness in non-mining sectors.

Tom Kennedy, an economist at JPMorgan Australia, said the participation rate will continue to mask the real employment picture in 2014. There’s “considerably more slack in the labor market” than the data suggest, he said.

With large numbers of baby boomers on the verge of retirement, the RBA said recently that Australia’s demographic “sweet spot” has already passed. That comes as commodity prices fall, confidence remains weak and a high local dollar undermines Australia’s competitiveness.

Mr. Stevens feels the RBA has done about all it can do to help. Will anyone in Canberra hear his cry for help?

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